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Essential factor to victory for democracy

Avoiding the appearance of impropriety and gaining trust based on fairness not profit

By D. LINDLEY YOUNG
 The Modern Tribune - April 29, 2004

WASHINGTON, D.C. (4/29) - On July 1, 2004, the Bush administration shall purport to pass sovereignty to Iraq. However, there is no real passing of any power if the right to control Iraq's major resource, oil, is not also passed. Right or wrong, the first concern of the anti-war protesters was that the U.S. was going to war for the Iraqi oil. A priority of the American military forces was preventing the burning of the oil wells. Among the first places protected by the U.S. was the Iraq oil ministry. It was a U.S. priority to get the Iraqi oil flowing and you can bet that one of the first contracts made after, if not before, the taking of Iraq was for oil. Yet, when the issue of passing sovereignty is discussed the issue of oil, contracts for oil and revenues from oil  is rarely, if ever, mentioned.

The U.S. Senate Foreign Relations Committee conducted hearings last week. Although numerous experts testified, including Richard Perle, Dr. Juan Cole, and many others, the issue of transferring control of Iraqi oil to Iraqis was not an issue. The report by Brahimi to the U.N. did not specifically make the privatization of Iraqi oil resources and what would happen with existing oil contracts an issue. Aside from cursory mention of the issue by some media, the oil, the revenues, and the status of existing oil contracts, if any, in a post-June 30th Iraq is not an issue in the transfer of "sovereignty."

How did we get to this point and what will we do about the oil issue? You can be sure that oil is, or will be, an issue in Iraq that may determine success or failure of the U.S. mission

Present government of Iraq

The Coalition Provisional Authority (CPA) is the name of the temporary governing body which has been designated by the United Nations as the lawful government of Iraq "until such time as Iraq is politically and socially stable enough to assume its sovereignty."  The CPA is led by the United States and the United Kingdom.  Ambassador L. Paul Bremer, III was named Presidential Envoy to Iraq on May 6, 2003 and in this capacity is the Administrator of the Coalition Provisional Authority. The CPA has been the government of Iraq since the overthrow of the Saddam Hussien's regime in April of 2003.

According to the CPA, it is "committed itself to rebuilding all aspects of Iraqi Infrastructure so that, upon turnover to the first democratically elected government Iraq has ever known, that government will assume authority over a country ready, both internally and externally, to function economically, provide basic services to its citizens, provide for its own defense, and to play a responsible role in the international community of nations." 

Establishing the Development Fund for Iraq

On May 21, 2003, United Nations Security Council Resolution 1483, sanctioned the establishment of the Development Fund for Iraq. Under a May 2003 U.N. Security Council resolution, the Coalition Provisional Authority is required to deposit all the proceeds of Iraqi oil exports into the fund. The resolution was intended to ensure Iraq's secretive U.S.-led civil administration was not engaged in any dubious practices in marketing the oil and was using the proceeds for reconstruction.

On May 22, 2003 President Bush issued Executive Order 13303, creating the Development Fund for Iraq and requiring all funds received from the development and sales of Iraq oil and petroleum products  to be placed in the Bank of Iraq and to be administered by the CPA.

International Advisory and Monitoring Board (IAMB)

International Advisory and Monitoring Board (IAMB) is responsible for monitoring the Development Fund for Iraq (DFI).

At the first meeting of the held at United Nations Headquarters, New York on Friday 5 December 2003, Koffi Annan, Secretary General, of the United Nations opened the meeting. He stated that the IAMB had the responsibility as an independent oversight body. He added that its independence could not be stressed enough and that it was fundamental to honoring the trust that the international community had placed in it. He noted that the Security Council had referred to it as the "eyes and ears of the international community."

The effectiveness of IAMB may be marginalized since they get their reports from the CPA.

Contracts for oil and petroleum

The CPA provides reports to the IAMB.

According to minutes of an IAMB  meeting held at the Arab Fund Offices in Kuwait on 17 and 18 March 2004, the IAMB was informed by the CPA that "some" contracts using DFI funds were awarded to Halliburton without competitive bidding. The CPA indicated that as a general rule, effective January 2004 contracts were no longer be awarded without competitive bidding.

The USAID, which is responsible for Iraq reconstruction contracts, says "USAID has awarded twelve contracts and five grants for reconstruction work in war-torn Iraq."

USAID makes no mention of contracts for sales and distribution of oil. USAID lists 15 "sectors" that it deals with including agriculture, airports, bridges and roads, a community action program, economic growth, education, electricity, food security, health, local governance, marshlands, seaports, and other sectors, but, not oil.

Under its economic development "sector," there is a reference to oil. It states it supports the "CPA's Oil for Food (OFF) Program in planning, program management, logistics, database applications, and communications to support the CPA OFF Coordination Centers in the north and south." That's all.

According to Occupation Watch, Mr. Negroponte, the proposed Ambassador to Iraq, appears to say that no contracts for oil exist, stating that it made sense for long-term matters like signing oil contracts to be left to an elected government. That may be taken as meaning that long-term contracts will be made after the new Iraqi government is installed.

An economic squeeze play

Iraq has world's second-largest oil reserves and its economy has been dominated by the oil sector, which has traditionally provided about 95% of foreign exchange earnings.

According to an April 30th Reuters report by Iraq Today, "Iraq has lost the only short-term option to finance oil projects by scrapping a $1.4 billion borrowing plan, raising more doubt about its ability to sustain output, industry insiders said on Friday."

It is ironic that while we are putting $20 Billion into Iraq (most of which has not been used), Iraq cannot obtain $1.4 billion to help generate revenue from oil that could support the nation. It seems like some type of an economic squeeze play. Iraq is under economic duress created by the war and if we are really bailing them out we would be putting the money into developing their primary resource.

What kind of leverage will there be for negotiating the oil contracts when financing essential to producing oil revenues will not exist?

Under these circumstances keeping public ownership of oil production – in order to promote democracy -- will be virtually impossible. Iraq will be forced to make deals with the devil and the country and its people will pay the price.. For this reason the purported passing of sovereignty on June 30th means nothing.

As put by Sabri Zire Al-Saadi, who held senior economic posts in Iraq, "If the oil industry is privatized before a reduction in the high dependence on oil revenue, then the only difference that Iraq will face is a change in the key player in its political economy: the foreign “devil” companies will replace the Iraqi “devil” governments. This is the worse scenario for Iraq."

If the US does not provide Iraq its own fishing rod, the fact that there are many fish means nothing to the Iraq people. That fishing rod is money to finance oil production. Otherwise, Iraq is left to the mercy of oil and finance companies.

Starting in the right direction

Jackson Diehl wrote an article entitled "Winning the Post-Postwar." He interviewed Frederick Barton, Senior Adviser,
Center for Strategic and International Studies (CSIS) and
a veteran the State Department, United Nations and National Security Council. Mr. Barton said, "What you are really trying to do is steer chaos in the right direction." According to Barton, success should be measured not by whether ideal political conditions are created, but by whether there is movement toward "a tipping point where you can start to hold people responsible."

Iraq cannot start to be responsible if they are put at the mercy of the oil and finance companies. Oil is the primary resource of the country.

Oil Production and sales

A February 21, 2003 CPA report to Ted Stevens
Chairman, U.S. Senate Committee on Appropriations, set forth certain information concerning Iraqi production and sales as of November 2003.

The report stated, Iraqi crude oil production for November was 63.7 million barrels. Of this 18 million barrels went to domestic production and 45.7 million barrels were sold for export for aggregate revenue totaling $1.188 billion. Average price per barrel was between $26 and $27. The average production per day was 2.12 million barrels, which exceeded the year-end target of 2.0 million barrels per day.

Crude oil production comes from two major areas, the southern oil fields near Basra and the northern oil fields near Kirkuk, with the majority of production occurring in the south. Because the Iraq-Turkey Pipeline remains closed, currently no crude oil is exported through the Turkish port of Ceyhan, and all exports go through Al-Basra Oil Terminal (ABOT). Iraqi oil revenues are limited by production capability and export capacity.

Export revenues for the month of November were $811 million. Five percent of Iraqi oil revenue is allocated to Kuwaiti war reparations, which totaled $40.6 million. The remaining 95 percent is deposited in the Development Fund for Iraq (DFI), which receives deposits from multiple funding sources and is used to support and finance the Iraqi Government’s budget.

Total oil revenues deposited into the DFI for the month of November were $770.8 million. According to the report, to date, disbursements from the DFI have been in support of the wheat purchase program, currency exchange program, electricity and oil infrastructure programs, Iraqi security forces equipment, Iraqi civil service salaries, and ministry budget operations.

Receipts and disbursements

As of April 24, according to a report by the CPA over $7 billion have been dispersed from the DFI. Over one billion dollars has been dispersed to or by the Ministry of Oil - second only to the Ministry of Finance which dispersed over $5 billion. The specifics of these disbursements is not readily available. According the CPA Administrator's Weekly Report (March 27-April 3, 2004), as of March 28, 2004, estimated crude oil export revenue reached $3.7 billion for 2004 alone.

According to an April 26, 2004 Reuters report, Baghdad has exported more than $8.2 billion in crude oil since last year's invasion of Iraq, the U.S.- led authority governing Iraq said on Monday.

The Reuters report went on, "The Coalition Provisional Authority had deposited a total of $8.27 billion in its Development Fund for Iraq as of last Thursday, it said in an Internet posting. Apart from the Web site, which is updated weekly, the provisional authority provides no other public data on sales of Iraqi oil, such as volume or price information or the reasons for weekly fluctuations in deposits into the fund."

According the the United Nations, The UN Controller has transferred a total of US $8.1 billion to the Development Fund for Iraq which was held by the UN form the Oil-for-Food Program. The latest transfer of $500 million was announced on 19 April. Transfers of $1 billion each were made on 28 May, 31 October and 18 November from the United Nations Iraq escrow account, at the request of the Security Council contained in paragraph 17 of resolution 1483. Another $2.6 billion was transferred on 31 December 2003 and a further $2 billion on 31 March 2004.

According to estimates approximately $16 billion has been received by the DFI. With a very broad brush, only about $7 billion has been accounted for. At this time there has been no full accounting as to the use of the money received by the DFI and none is expected until after June 30th.

Pumping the oil out of Iraq at high rate

According to an OPEC Monthly Oil Market Report for April 2004, OPEC output for the month of March was above the production for February, "the main contributor to which was Iraq."  Oil production averaged 2 million barrels per day (MBPD) in 2002.

Production capacity now exceeds pre-conflict levels and pre-conflict expectations. Currently, Iraq production stands from 2.3 to 2.5 MBPD.

According to some, this high rate of production can have adverse consequences to the oil fields and oil supply. It would appear to the the oil is being sucked out of Iraq as fast as it can be while the CPA and US companies - Halliburton - maintain control of Iraq's greatest resource.

Their appear to be plans to use the money produced from the Iraq oil for Halliburton to drill more oil fields to maximize future output - not a good sign for real Iraqi sovereignty. It has been reported the Iraq oil is tied up by US companies until 2007 and that they stand to make trillions of dollars.

The need for transparency

The reconstruction of Iraq is one of the biggest projects to have been undertaken in over 50 years and oil is at the center of the financing of this project. Svetlana Tsalik, director of the Open Society Institute’s Revenue Watch program, told the U.S. Institute of Peace on January 22 that Iraq ’s oil revenues "are likely to become a source of instability if they are not managed in a transparent manner by a government that the Iraqi people see as legitimate." See: Oil Revenue Accountability in Iraq: Breaking the Resource Curse

According to a report by Iraqi Revenue Watch: "Ahead of a deadline for the transfer of power, the Coalition Provisional Authority's reporting of Iraqi finances falls short of international standards of accounting and transparency" according to said a report by the Open Society Institute's Iraq Revenue Watch project.

"Budgetary transparency and accountability can help ensure that Iraq does not revert to Saddam Hussein's tyranny of secrecy," said Anthony Shorris, Frederick H. Schultz Professor of at Princeton University, who authored the report. "The people of Iraq-as well as the global financial community-must understand the sources and uses of their country's resources."

June 30th established by agreement

According to the Agreement of November 15th, 2003 between the CPA and the Iraqi Governing Council,  by June 30, 2004 the new transitional administration will be recognized by the Coalition, and will assume full sovereign powers for governing Iraq. Upon this transfer, the CPA will dissolve. The CPA does not specifically mention where the funds acquired by the DFI will go.

The CPA does not say what happens with existing oil and petroleum contracts or whether the will also dissolve.

In Brahimi's recent report to the U.N. on the transition of limited sovereignty to an Iraqi "caretaker" interim government - pending the January 2005 elections in Iraq -  Brahimi was specific that contracts made by the "caretaker" government during their tenure should only be validated once an elected Iraqi government was in place and indicated that they should be avoided. Brahimi's report did not include recommendations about existing contracts made in a no bid process and selected by U.S. Agency for International Development (USAID), which is actually an arm of the U.S. government.

The commitment by the CPA, noted above, to provide an Iraq "ready ... to function economically" may mean that the existing contracts for oil and petroleum production and sales will remain in place. I have not found where the CPA has directly addressed the issue of the new democratic Iraqi government's ability to make new contracts for oil or to  dissolve existing ones.

No vote by IGC in CPA

Deputy Minister Faik Ali Abdul-Rasool, representing the Observer, Minister Mehdi Hafedh, requested that persons representing the Iraqi Governing Council be given the right to vote. The IAMB stated that it welcomed the presence of Iraqi nationals at its meeting and that it looked forward to attendance by Iraqi nationals at future meetings. However, the IAMB indicated that acceding to this specific request would require amendments to the IAMB's Terms of Reference. Further, such Iraqi participation raises a number of complex legal issues, including under UN SCR 1483 (2003). So far the Iraqi nationals have had no real say.

Conclusion

How we deal with the oil, or permit the oil to be dealt with, is an issue that goes to the heart of trust and of winning the "hearts and minds" of the Iraqi people and the world. If the perception is left that the U.S. and U.S. companies are profiteering at the expense of the Iraqi people, the Iraqi people will not trust us or anyone we are involved with.

We cannot tout freedom and create and permit economic oppression or profiteering and expect a peaceful democratic Iraq. There may always be a struggle for religious and political power and warring factions, but, the U.S. should not contribute to creating the appearance of impropriety by permitting excessive control of the oil through U.S. companies and banks which does not maximize the return to the Iraqi people.

Transferring "sovereignty" must transfer the power over the oil and that power is meaningless without start-up financing which seems to be being withheld in order to create the environment for profiteering.

Before the war on Iraq  Tariq Aziz, Iraq's then deputy prime minister said "The weapons of mass destruction is just an excuse. The Americans are after the Iraqi oil." American needs to change this perception. It cannot do that if the ability to control the oil is not part of sovereignty.

Failure to address the oil issue when addressing the issue of Iraq sovereignty is petitio principii - "Begging the Question." Begging the question creates a perception of impropriety especially when billions are being spent while Iraqi cannot finance its oil industry.

We should avoid even the appearance of impropriety and seek to gain trust of the Iraqi people based with fairness not profit, transparency not secrecy and real help for the oil sector by eliminating the economic duress that will require  privatization an permit profiteering. You cannot gain the trust of the Iraqi people if there is a perception that the U.S. is taking their oil and determining whether the revenues go for reconstruction.

Thanks Beth, Doug and Rick

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